In the Matter of Sourcewater, Incorporated. Debtor Joshua Adler v. Energy Debt Holdings L.L.C
June 16, 2026·25-20479·Per Curiam·By Maria Santos
The Fifth Circuit affirmed a sanctions order against a debtor's chief executive officer for violating bankruptcy court orders. The court held that the officer acted in bad faith by filing a priority challenge outside the designated timeline.
Sourcewater, Incorporated filed for Chapter eleven bankruptcy in the Southern District of Texas. The bankruptcy court issued a Cash Collateral Order establishing a specific period to challenge creditor obligations. The debtor’s CEO, Joshua Adler, later filed an adversary proceeding to subordinate a creditor’s claim one day before a sale hearing, outside the permitted challenge window. The bankruptcy court imposed sanctions for violating the orders, and the district court affirmed.
The court’s reasoning
The Fifth Circuit reviewed the sanctions for abuse of discretion and found substantial evidence that the debtor’s CEO acted in bad faith. The court agreed that the Cash Collateral Order and Confirmation Order clearly specified the timeline for challenging priority. Filing the adversary proceeding outside this timeline violated the orders and constituted bad faith conduct justifying sanctions.
What it means going forward
The ruling reinforces that bankruptcy orders establishing challenge periods are binding and that violations outside those periods can result in monetary sanctions for bad faith conduct.
